Cloud is Making Software Vendors 'Schizoid'

While the IT world has largely embraced the cloud as an enabler of innovation and an efficient ax for cost cutting, traditional software vendors are left reeling. For one thing, the switch to cloud means an end to front-end licensing and ongoing maintenance revenues and a steep increase in short-term costs associated with re-architecting. In an effort to cope, many try to fudge.

"It's expensive to re-architect so they try to host instead, which, of course, is just on-premise software at a different address," explained Michael Krigsman, CEO of Asuret, a Boston-based consulting company.

The software vendors can't achieve economies of scale by hosting either, so the problem is worsened and not solved by this approach, a la the early days of software-as-a-service (SaaS) when it was called ASP (application service provider). True SaaS means the vendor can patch or update the program once and the change affects all clients simultaneously. On-premise software, whether housed in the customer's data center or hosted at the vendor's, has to be patched and updated one system at a time.

Follow the money

In the highly competitive marketplace where everything must be done fast and cheap, traditional software vendors are left crushed between too little revenue and too much cost.

The theory goes that the real profits are in the fee-per-use model, not the chunk-o-money upfront licensing fees. "In the long run, there is a lot more revenue if you charge per transaction than if you charge per user," said Esteban Kolsky, a noted CRM strategist and consultant. "But software vendors don't recognize this, or the build-up to it is cumbersome enough that they don't want to do it."

Traditional software vendors cannot simply convert their products to the cloud with just a touch of new coding. No, the software pretty much has to be rebuilt from scratch and that takes time and money and a willingness to work with (and sometimes include) new technologies into the formula. While vendors struggle with the technical and revenue problems, it's the buyers that are struggling with the time issue.

"Enterprise demand for cloud solutions is outstripping traditional, trusted software brands' ability to supply them; forcing CIOs to face the complexity of adopting new and unproven brands for their solutions," said Chris Holland, VP of Software Rights Management Division at SafeNet .

"As a software reseller the biggest negative effect of the cloud is the difficulty in making all of the organization's software work together," said Michael Wallace, director of Software Services at InfoSystems . "The standards for interoperability are immature, so it becomes more difficult to integrate applications."

The CIO may also have less control over when upgrades are implemented, he said, which could have a negative impact on other applications.

CIO backlash

It doesn't help that many software vendors have burned the very bridges they now need to cross the chasm of change and make their cloud offerings truly profitable.

"As much as vendors like to sell outside of IT, which most of cloud sales these days are, the day of reckoning is coming," said Kolsky. "CIOs and IT departments are starting to exercise their right to veto what moves through their networks and some vendors are being left in awkward situations; having to go back and deal with the department they, not too long ago, derided."

Often times vendors are not even sure what they are selling or to whom.

"This becomes an issue with messaging, pricing, and positioning for them," said Kolsky. The result? Vendors end up selling to the wrong entity within the organization and expanding from there is nearly impossible (or the buyer compares apples to oranges and makes the wrong decision).

Once vendors do make the change-over, problems remain.

"Vendors have not yet figured out an effective way to audit their clients' use of applications in the cloud, which has caused revenue loss," said Phara McLachlan, CEO of Animus Solutions.

Budget-conscious CIOs are likely to challenge transaction costs that appear high or poorly documented. Without a trustworthy means to audit, vendors could end up picked clean. But, if vendors add a cushion to the charges in an effort to ensure they are not losing revenue, CIOs are likely to feel fleeced and sheer the vendor from their IT portfolio.

After all, pricing is the main driver behind cloud adoption.

"For example, the cost of storage is 10 cents for a gigabyte of storage at Amazon AWS," explained Sakthi Chandra, VP of Marketing at Nexenta Systems. "CIOs are pushing their IT managers to meet or beat these metrics in internal deployments. This puts enormous pressure on legacy software vendors to change their pricing models/ROI metrics to meet the new standards."

In the end, said Krigsman, the cloud induces "schizoid, split-personality vendor syndrome" in on-premise software vendors.

There's not likely to be a treatment or cure for that any time soon.

A prolific and versatile writer, Pam Baker's published credits include numerous articles in leading publications including, but not limited to: Institutional Investor magazine, CIO.com, NetworkWorld, ComputerWorld, IT World, Linux World, Internet News, E-Commerce Times, LinuxInsider, CIO Today Magazine, NPTech News (nonprofits), MedTech Journal, I Six Sigma magazine, Computer Sweden, NY Times, and Knight-Ridder/McClatchy newspapers. She has also authored several analytical studies on technology and eight books. Baker also wrote and produced an award-winning documentary on paper-making. She is a member of the National Press Club (NPC), Society of Professional Journalists (SPJ), and the Internet Press Guild (IPG).